The rapidly developing digital technologies, steadily penetrating into all spheres of our life, have not bypassed the real estate market, where the term PropTech is increasingly mentioned.

PropTech (from the English.  Property Technologies  technologies in real estate) is a multifaceted phenomenon. It combines all modern innovative technologies and applied solutions in the field of real estate creation and management (real estate transactions, investment analysis, construction and design, development, real estate maintenance, etc.).

Startups in the field of PropTech are developing in two main directions: they offer tools that can help real estate professionals improve their services or increase productivity, or they are trying to replace professionals.

So what does PropTech carry with it and what effect can it have on one of the most seemingly stable markets?

PropTech – a new trend in the real estate market SergeyNivens /

How do PropTech meet on the real estate market?

Let us turn to numbers. The results of a KPMG survey conducted in the summer of 2018 among the leading real estate players showed the following: 97% of respondents believe that digital and technological innovations will affect their business in any case, while 60% are convinced that this will have a significant impact. 78% of respondents noted that such influence has already increased in the past 12 months.

The majority of survey participants (73%) evaluate PropTech positively, considering this trend as a new opportunity for the development of their business, but 25% see it as a kind of threat. Recognizing the inevitability of innovation and their overall positive direction, 56% of respondents admit that they cannot yet speak of the “digital maturity” of their companies. Only 7% of respondents are convinced that in this area are at the forefront.

30% of survey participants indicated that they are already investing or planning to invest in PropTech start-ups, while 66% indicated that they still have no clear idea about the prospects for using digital and technological innovations or the corresponding strategies.

It is interesting how the perception of the survey participants about what exactly PropTech’s achievements will influence the activities of their companies and the real estate market as a whole has changed over the year. So, the majority of survey participants of KPMG 2017 (53%) suggested that in the next three years their companies would most likely use PropTech innovations in the field of “big data” (from English  Big Data  – structured and unstructured data, which differ in outstanding volumes and processed by certain software tools) and analytics.

Talking about what trends PropTech in the next five years will have the greatest impact on the property market as a whole, 44% respondentova also highlighted big data, 16% said things Internet capabilities (from Eng.   Of Internet of Things, the IoT  – unified network-related facilities among themselves through the Internet, capable of collecting data and sharing them. Such objects may include household appliances, cars, etc.), and 15% – the development of artificial intelligence.

Many participants in the real estate market do not yet have a clear idea about the prospects for the use of digital and technological innovations, nor the corresponding strategies of ra2studio / Depositphotos

The 2018 survey showed that in the short term, respondents expect automation to have a greater impact on the real estate market as a whole and on their own companies (30 and 31%, respectively). In second place (in 27% in both cases) were “big data”. Third place was shared by artificial intelligence and the Internet of things. In the long term, the greatest impact is expected from artificial intelligence technologies (32 and 28%).

We note that real estate market players do not yet see the really serious potential of such innovations as blockchain, autonomous vehicles (including drones or self-driving machines), 3D printing technology, virtual or augmented reality, 5G.

Are investors ready to support PropTech?

Statistics show that in solving the problem of investing PropTech projects, 2017 was a turning point. Starting in 2016, start-ups in this area began to receive tangible support from venture capital funds. For example, in the United Statesalone  , the volume of relevant investments increased from 44.7 million dollars in 2012 to 6.5 billion dollars in 2017.

Market research conducted by RE: Tech showed that in 2017 funds invested about $ 12.6 billion in PropTech, thus supporting 347 transactions. The global investment in this area of ​​the market increased by 92%. In 2018, this trend continued.

Thanks to innovative technologies, large investors also appreciated the new opportunities offered to the real estate market: it was SoftBank that repeatedly invested in PropTech; Amazon has invested in a modular housing company; Sequoia Capital supported AirWnb and WeWork’s.

Experts point out that investors already interested in the real estate market, using technologies rather than technology companies, are ready to offer new solutions and products for this area to attract more interest from investors.

What changes bring new technologies to the real estate market?

Despite the fact that the real estate market is traditionally quite conservative, many experts agree: in the coming years, due to the growing demand for innovation, it will inevitably change beyond recognition. Many projects are aimed at helping the buyer to find his dream home without the participation of intermediaries or to organize a happy meeting of the landlord and tenant.

As shown by a survey conducted by HSBC analysts, 37% of respondents – real estate buyers felt uncomfortable (under stress) during forced communication with many people involved in a deal (real estate agents, lawyers, salespeople, etc.). 29% of respondents considered the negotiations on the price too exhausting, 28% considered the resolution of tax issues, and 24% considered drawing up the necessary legal documents.

The number of transactions concluded without prior visits to the property is increasing alexroz / Depositphotos

Modern technologies and online platforms will provide users with the opportunity to make transactions independently. Acquisition and sale of real estate will be greatly simplified. Today, among the most famous PropTech startups that have taken on the functions of realtors, one can single out American Redfin, Zillow, OpenDoor, Trulia. In the UK, Tepilo service is gaining popularity, in China – Homelink. In their work, companies use big data analysis, which allows them to form proposals that match the client’s requests.

The development of such projects will affect the work of real estate agents, who are likely to become only consultants and / or providers of technology platforms.

According to HSBC research, most consumers are not yet ready to trust chat botsor robot consultants in matters of mortgage lending (only 11% of respondents would decide to do this). Experts believe that this, in turn, leaves room for technological solutions that allow receiving remote consultations through online chat rooms or video chat. In addition, the quality of service provided by chat bots is rapidly increasing, and their flaws are becoming less and less obvious.

Using data analytics and artificial intelligence, property owners will be able to get comprehensive information about the demand for certain objects, as well as forecasts and recommendations. This is exactly how the startup Skyline AI, which offers investment advisor services, operates. The program independently determines the most profitable assets for investments, tells you when it is better to carry out a major overhaul or increase the rent.

The development of virtual reality technologies (VR), through which preliminary inspection of real estate assets can be carried out remotely, will be able to seriously affect the processes of acquiring real estate (especially foreign). Virtual reality makes it possible to thoroughly examine the preliminary planning and design of the premises before the repair works are carried out, and if necessary, make adjustments.

The use of VR-technology allows you to conduct virtual tours of buildings, and you can inspect the object both from a computer monitor in 2D-format, and using special VR-glasses in 3D mode. In addition, the client is usually provided with detailed panoramic photos and the ability to monitor the object (including those under construction) in real time via webcams with a 360 ° view. One of the recognized leaders in the creation of VR are EyeSpy360 (UK) and Matterport (USA).

In a survey conducted by the online broker Redfin (USA) in 2017, 33% of respondents said they made a decision to buy a house without actually visiting the facility, taking advantage of the opportunities provided by digital technology (in 2016 only 19% of respondents acted that way) .

The influence of PropTech is not limited to interfering in the process of making sales and rental transactions. Modern technology allows you to automate the management of real estate. Such programs help, for example, track the terms of lease agreements, manage bills, keep track of property, pay taxes, place objects for rent on ad sites, and monitor income and expenses. Today, the field of property management confidently conquers SMS Assist.

PropTech services offering solutions based on the Internet of things and artificial intelligence help minimize the costs associated with servicing real estate – help control energy consumption, timely detect faults and equipment defects, etc.

For example, an enertiv startup from New York promises its customers up to 5% savings in operating costs due to solutions based on machine learning, big data and IoT. The company provides buildings with various sensors that continuously transmit information about its condition. In this case, the system itself determines the malfunction, or detects equipment that is on the verge of failure and informs about it. In addition, the system allows landlords to track the occupancy of objects in real time.

Many PropTech companies work by combining several technology solutions. For example, Opendoor acquires real estate through the Internet, directly from homeowners, at a price set by an algorithm based on Big Data. Having improved housing, they bring it back to the market. Using big data, the Internet of things, digitalization, the company greatly simplifies the purchase process – electronic locks installed in buildings and premises allow real estate viewing at any time convenient for the buyer, without an appointment. It is not necessary in the presence of an agent. The lock code can be obtained through a special application.

The impact of PropTech on the real estate market will inevitably grow under the influence of the demand for innovation. Buying a residential or commercial facility anywhere in the world will be as easy as buying securities, and virtual assistants will manage the facilities.

The success of traditional market players will soon depend on how quickly they can adapt to the changes taking place.

Material prepared for PropTechRussia.com

Note: January 2019 data below are the most recent released by the National Association of Realtors.

Existing-home sales experienced a minor drop for the third consecutive month in January, according to the National Association of Realtors®. Of the four major U.S. regions, only the Northeast saw an uptick in sales activity in January.

Total existing-home sales (transactions including single-family homes, townhomes, condominiums and co-ops) decreased 1.2 percent from December to a seasonally adjusted annual rate of 4.94 million in January. Sales were down 8.5 percent from a year ago (5.40 million in January 2018).

NAR’s chief economist, Lawrence Yun says January’s home sales of 4.94 million were the lowest since November 2015, but that he does not expect the numbers to decline further going forward. “Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low. Moderating home prices combined with gains in household income will boost housing affordability, bringing more buyers to the market in the coming months.”

The median existing-home price for all housing types in January was $247,500, up 2.8 percent from January 2018 ($240,800). January’s price increase marks the 83rd straight month of year-over-year gains.

Total housing inventory at the end of January increased to 1.59 million, up from 1.53 million existing homes available for sale in December, and represents an increase from 1.52 million a year ago. Unsold inventory is at a 3.9-month supply at the current sales pace, up from 3.7 months in December and from 3.4 months in January 2018.

Properties remained on the market for an average of 49 days in January, up from 46 days in December and 42 days a year ago. Thirty-eight percent of homes sold in January were on the market for less than a month.

Per Freddie Mac data, the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 4.46 percent in January from 4.64 percent in December. The average commitment rate for all of 2018 was 4.54 percent.

First-time buyers were responsible for 29 percent of sales in January, down from last month (32 percent), but the same as a year ago.

HOW’S YOUR SELLING STRATEGY

Sellers, you have an excellent opportunity to sell your home this season — if you have the right pricing strategy in place from the start! Studies show that the longer a property stays on the market, the less the seller will net upon the sale.

It is very important to price your property at a competitive market value at the signing of your listing contract. In some places, the market is so competitive that even over-pricing by a few thousand dollars could mean that your house will not sell. And in some of today’s particularly hot markets where we’re seeing bidding wars, you still want to work with your agent to set the right starting price from the outset to give yourself every advantage.

An Overpriced Home:

• Minimizes offers
  · Decreases agents response
  · Limits qualified buyers
  · Decreases showings
  · Decreases prospects
  · Limits financing
  · Wastes advertising dollars
  · Nets less for the seller

When you are ready, contact us today for a personal market value analysis of your home. No hassles or obligation – just honest advice on how to get top dollar for your home!

INVESTING IN REAL ESTATE

Today’s low interest rates and stabilized home prices have created some great investment opportunities! Investing in real estate has unique advantages over other types of investments:

• Interest in mortgage loans are tax-deductible.  Investors can lower their tax liability while increasing their equity.
• Renters pay down your mortgage loan.  Investors reap the benefits of rental income, which offsets your mortgage cost and build equity.
• Real Estate values increase over the long term.  Real Estate is limited and will always be in demand.
• 1031 exchanges are available to defer taxable income when you are ready to sell.

Many investors are taking advantage of these great market conditions.

US continues to be the world’s largest commercial property market by transaction volume, despite dynamic fluctuations observed in recent years. That way, the total transaction amount in 2017 has come to $376b, around 8% less than in 2016. However, over the first three quarters of 2018, the investment volume in US property increased by 14% to $341b. The total transaction volume has risen by 10% year-on-year in 2018, according to estimates from JLL. The dramatic decline in investment coming from China most notably affected the commercial property markets of New York (where the total transaction amount decreased by 54%) and San Francisco (where it dropped by 52%), the two cities accounting for two-thirds of the total Chinese investment in US properties.

Many investors who invest in overseas property, tend to high returns. However, not everyone understands that a higher initial yield implies greater risks, that is, the likelihood of a decrease in income in the long run.

We recommend clients to assess risks in advance and think through an investment strategy with an optimal balance of profitability, reliability, labor costs and other factors of investment efficiency. Most Tranio customers have a simple rental business in a stable location, with a long-term rental contract and management through a management company. In this article we will look at how to ensure the best profitability with such a strategy.

Why simple rental business

Typical investors who use the services of Tranio are successful entrepreneurs from Russia, Brazil, Iran or China. As a rule, in their homeland they have an active business that makes the main profit. From overseas property, they prefer to receive passive income with minimal involvement in management. This investment is not so much for profit, but with the aim of preserving capital and protecting it from the political and economic risks of its country.

Most customers do not plan to sell their profitable real estate in the short term. This property provides investors with a personal pension fund and serves as a guarantee of the financial well-being of their children. Another important motive – a residence permit in the United States or European countries, which provide such an opportunity to real estate buyers.

Value added projects, construction or redevelopment, are usually not suitable for our investors. Investments in them are associated with high risks, among which are cost overruns, difficulties in obtaining permits, an overpriced purchase price, and a long search for a buyer. The investor is required to actively participate in the project and certain qualifications in the construction business. Development projects are effective as the main type of activity, and not as a tool to preserve capital.

Thus, we recommend non-core investors a simple rental business: to buy real estate and lease it. This is a low-risk and easy-to-implement strategy.

Budget and object types

We recommend considering investments in overseas property with a budget of 200 thousand euros. Cheaper, with rare exceptions, it is difficult to buy a liquid object. In this segment, we recommend buying residential apartments. Among their advantages is high liquidity and stable demand.

With a budget of over 2.5 million euros, it is worth targeting commercial properties, primarily commercial real estate and nursing homes.

Regardless of the budget, 50–60% of the value of the property can usually be taken on credit, so you can start investing in profitable real estate from 100 thousand euros of your own funds.

Types of commercial real estate and their parametersTranio data (average recommended indicators) *

* Average indicators for objects:

• in prosperous areas of major European cities;
• new facilities or after major repairs;
• rental contracts at the beginning of the term.

Location

From the location of the object is directly dependent on the risks and profitability of investments. We recommend investing in countries with a developed economy and a stable political system. Austria, Great Britain, Germany, USA, France and Switzerland are the least risky: in these countries the probability of hyperinflation, the fall in national currencies and the decline in GDP are the least.

Most Russian clients prefer Germany because of geographical proximity, and also because, compared with the other countries listed, profitability in Germany is slightly higher, credit conditions are better, and taxes are slightly lower. But other countries from this list are also of interest: for example, some investors choose the United States because they expect more capitalization there, others fear a weakening of the German economy due to political events, and still others are buying income property in countries where their business or personal interests .

We also advise you to take into account the currency in which the investor’s family spending in 5–10 years will be nominated . For example, if you have residential property in the UK and your children study there, then it is worth looking at the objects whose rental income is generated in pounds sterling.

Among settlements, it is better to choose either megalopolises and their prosperous suburbs, or cities of medium size with a growing population, a developed labor market and a potential for economic growth. We advise you to focus on proven locations, which already have a successful investment experience compatriots. For example, successful options are the Western European capitals and major cities of West Germany.

The choice of the area depends on the type of property. For example, it is better to buy street shops on the main streets with heavy traffic, and retail and warehouse premises – on the outskirts of a large city near the highway.

Tenants and Leases

If you rent residential property, then middle-class people with a good credit history and stable income are preferable as tenants. And in the segment of commercial real estate the least risky objects that have already been leased to large corporate tenants working in the market for tens or hundreds of years are least risky. The probability of bankruptcy of such tenants is less than that of small private companies. Information about the financial status of tenants can be requested from lawyers in the process of examination of the object (Due Diligence).

Objects with a large number of tenants (for example, apartment buildings or shopping centers) are not suitable for foreign non-core investors. In our experience, if there are more than five tenants, this significantly increases the risk of management and increases the requirements for the professionalism of the management company. It is best to buy property with a single tenant.

An important condition of the lease is the separation of costs for the maintenance of the object between the owner and the tenant: who pays tax on real estate, utilities, insurance and other expenditure items. We advise to reduce risks by buying objects in which the maximum operating costs assigned to the tenant. Agreements of this type are called NN Lease (Double Net Lease) or NNN Lease (Triple Net Lease), their differences from other options are shown in the table:

It is recommended to acquire objects with long-term (10–20 years) rental contracts without the right of termination, and with a fixed rental rate without reference to the operating indicators of the tenant’s business. Keep in mind that such an agreement imposes obligations on both sides: it is not only that the tenant guarantees stable rent for the entire term, but also that the owner does not have the right to evict the tenant before the expiration of the contract.

Long-term contracts provide the investor with additional insurance against price corrections, from which even the most reliable real estate markets are not protected. If you have invested in an object with a 15–20-year contract, then with a high degree of probability the period of price reduction will fall on the first 10 years of ownership, since real estate market cycles replace each other every 7–10 years . In case of hard contracts for 15–20 years, price fluctuations will not affect your income, since it is impossible to terminate the contract or reduce the rent. Thus, you can wait until the market recovers, and exit the project with a successful market situation.

Even with long-term contracts, it is usually possible to index rental rates in accordance with inflation, that is, annually raise them by about 1–2% . With the positive development of the market this has its drawbacks. For example, if the real estate market grows by 4% every year, and after 10 years you would like to donate an object that is significantly more expensive than inflation, you will not be able to do this, because the contract limits you. Therefore, investors who believe in the rise of the market in the long term, it is better to buy objects with five-year contracts (for example, commercial property on pedestrian streets) and index the rental price at the end of the contract.

Cost growth potential

Low risk assets in Western markets are sold with an initial rental yield of 3 to 7%. We consider buying objects with an initial yield of more than 7% unjustified and disadvantageous for a foreign investor: in such projects it is highly likely that any risk is realized on the horizon of 5–10 years , the cost of eliminating which will be higher than the risk premium at the entrance.

In addition, markets with a low level of risk and profitability (as a rule, these are centers and prestigious districts of large cities) are becoming more expensive than those that are characterized by high initial profitability and associated high risks.

For example, as a retrospective analysis of real estate prices in the USA showed by Tranio , from 2001 to 2015 objects with an initial yield of 3% grew in price by an average of 5% per year, with a yield of 5% – by 4.7%, with a yield of 7 % – only by 3.5% per year, and objects with a yield of 9% could fall in price. At the same time, among the objects that became cheaper, the ones that had a lower yield lost the least in value. The probability of price falling is higher for objects with a higher initial yield, so taking into account the likelihood of the realization of this risk, objects with an initial yield of 3–7% result in a higher total yield.

For the forecast of price increases, the development prospects of the district are also important. The real estate where the gentrification occurs is the fastest growing – the process by which industrial areas are transformed into prestigious residential areas, the territory is improved, the infrastructure is developed, and low-income people are replaced by more affluent. At the same time, the most advantageous areas are located close to the city center or have convenient transport links to the center.

Optimum profitability depends not only on risks, but also on the duration of the investment. The shorter the term, the greater the initial yield makes sense within the range of 3–7% . For example, without taking into account a loan with a 20-year investment period, the highest total return (taking into account the growth of capitalization) is achieved with an initial yield of 3.8–5.8% ; and if the investment period is 10 years, then the optimal initial yield is 4.5–6.5% . This conclusion Tranio analysts received as a result of a study of 100 pairs of “profitability – capitalization increase” for residential and non-residential real estate in Germany. 

Credit

You can increase profitability with a mortgage.

The money raised by the mortgage is cheaper than the tenant pays the rent. For example, when buying investment property in Germany, you can count on a loan of up to 60% of the value of the object at 2-3% per annum. With a rental yield of 6.5%, the return on invested capital, taking into account the loan, can reach 8-10% .

In general, the cheapest loans are at a floating rate without the possibility of early repayment, and the most expensive ones are at a fixed rate, allowing early repayment.

It is better to take a loan for a long period (10-15 years) : the longer the term, the more expensive the money, but the less risk that the negative market conditions affect the refinancing conditions. In the case of commercial real estate, it is recommended to draw up a mortgage under a scheme whereby interest is paid first and the loan body closer to the end of the loan term. It is desirable that by the end of the term not less than 40–50% of the body be extinguished .

It is not worth refinancing an object and borrowing too much. But one should not borrow too little, since it would be strange not to use the opportunity to get a loan at a lower price than the tenant pays.

Tax optimization

As for the optimization of the tax on income, individuals in Europe and the United States pay it in proportion to the amount of income, and real estate worth up to 1 million euros is easier to issue to an individual. A more expensive property is more profitable to register for a company, because legal entities usually have a flat and lower income tax rate. It is also easier for companies to reduce the taxable base due to depreciation and deductions on loans from the bank and the founder.

Best of all, if the transaction can be organized so as to pay taxes only in the country where the property is located. Such a possibility depends on the tax residency of the investor, interstate agreements on the avoidance of double taxation, form of ownership and other factors. Tranio consultants, with the help of tax advisors, help each client individually structure the transaction and arrange a loan on optimal terms.

Exit from the project

The usual tenure of ownership of a real estate before the sale is 5–20 years . As a rule, you need at least 13-14 years for the object to pay off and start making a profit. In some countries, investors are guided by the term for the sale after which the capital gains tax is not paid (for example, in Germany it is 10 years).

Whether it will be possible to profitably sell real estate in many years is one of the key risks of an investment, which is often not taken into account by clients who are interested in high returns. They are attracted by offers with an initial yield of 8% and higher; typical examples are parking or housing for students on the periphery. The key disadvantage of such facilities is low liquidity, that is, small demand for purchases. If you are going to sell them, you will have to significantly reduce the price, which ultimately eliminates the high initial yield.

With a planning horizon of 10–20 years, we recommend considering commercial real estate with an initial yield of 5% (while observing the remaining recommendations from this article). Most often, their value grows by 2-3% per year with the market or even faster. These are reliable objects that can be profitably sold ahead of schedule if your plans change. And under a stressful scenario, such real estate loses less in value than more risky objects with a high initial yield.

However, if you are going to sell the property in 1-3 years , then it is best to buy the most profitable property in the region with growth potential. Today, Spain is considered one of these locations in Europe with its central markets in Madrid and Barcelona. However, it is impossible to say whether the growth of these markets will continue in the next 10–20 years , so for long-term investments aimed at preserving capital, it is better to choose more predictable locations.

If you plan not to sell real estate, but leave it to your heirs, then it is important to choose the correct format of ownership in order to optimize inheritance taxes. For example, in France there are no inheritance and gift taxes if the object is registered for a civil real estate company (SCI). And in the UK, inheritance tax is not subject to real estate issued to an offshore company.

Here is a summary of Tranio’s key recommendations for overseas property investors:

Jessica Lautz, vice president of demographics and behavioral research for the National Association of Realtors speaks during the Cape Fear Realtors Affordable Housing Summit on Wednesday, February 13, 2019 in Wilmington:

“Average home prices have risen 22 to 30 percent in the tri-county area in the past six years” – according to a report produced for Cape Fear Realtors and distributed Wednesday morning during the organization’s Housing Affordability Summit at The Terraces on Sir Tyler in Wilmington.

“In New Hanover County, the figures showed a rise of 25 percent from 2012 to 2018 in the average price of a new home (about $285,000 in 2012 to $355,000 last year) and 28 percent for an existing home (about $234,000 to $301,000)

Pender County, showed the greatest average price gains: 27 percent for new homes (an increase of $64,000 to a little over $300,000) and 30 percent for existing homes (a jump from $210,000 to $273,000).”